ESR Grows Revenue 6% on Rising Fee Income, Targets $750M in Disposals

ESR grew its revenue 6.1 percent to $871 million in 2023 on the back of higher management fee income, while total assets under management increased 7.3 percent to $156 billion, according to the company’s annual results announced Thursday.

The company is continuing its shift to an asset light strategy, with fund management EBITDA increasing 2 percent year-on-year to a record $579 million in 2023. That sum accounted for 60 percent of ESR’s total segmental EBITDA last year, compared to 21 percent at IPO in 2019. Fee-related assets under management grew 6.3 percent to $81 billion.

 

“We have delivered on our three core priorities over the past 12 months, including reinforcing our market leadership in New Economy with over $6 billion in development starts and over $4 billion of completions; further simplifying and streamlining the business with the recent sale of the ARA Private Funds business; and growing our AUM and Fund Management EBITDA to now reach nearly 60 percent of our Segmental EBITDA,” ESR co-founders and co-CEOs Jeffrey Shen and Stuart Gibson said in a release.

In addition to the growth in fee income, the company also highlighted strong rental growth in several markets, with rental reversions of 8.2 percent across the overall portfolio and 14.3 percent ex-China.

Asset Light Transition Continues

The Hong Kong-listed fund manager and developer booked attributable net profit of $268 million last year, representing a 59.8 percent year-on-year decline, as the its earnings were dented by losses attributable to its stake in Australian property firm Cromwell Property Group as well as higher interest expenses. ESR notched profit after tax and minority interests for 2023 of $400 million, which was down 38.8 percent from the $655 million earned a year earlier.

ESR intends to continue growing recurring fee revenue at the same time that it aims to reduce leverage by divesting up to $2 billion of assets to fee income generating ESR-managed vehicles over the next 12 months, with the company identifying Greater China as a key target market for those disposals.

In addition to those divestments, the company is targeting $750 million of non-core disposals, which includes $290 million in net proceeds from the sale of ARA Private Funds to Sumitomo Mitsui Finance and Leasing Co announced earlier this month.

“The Group is on track to complete over $500 million worth of announced transactions and are targeting up to a further $1.5 billion to $2 billion over the next 12 months,” ESR said in the release. “These planned sell-downs to ESR managed vehicles along with the announced non-core divestments is expected to reduce the Group’s gearing over the medium term towards the low end of the Group’s gearing target of 20 percent to 30 percent. The interest savings made on lower gearing would add to potential distributions or provide capital for future share buybacks.”

ESR booked a $119.4 million loss attributable to its 30.69 percent stake in ASX-listed Cromwell Property Group, which reported a statutory loss of A$271.4 million for the half year ended December 2023 on the back of an A$240.2 million valuation decline in its Australian and European investment properties. ESR had been considering divesting its interest in Cromwell since March 2023 after inheriting the stake through its 2022 acquisition of ARA Asset Management.

ESR announced its earnings a day after it declared to the HKEX that Starwood Capital is purchasing a 10.657 percent stake in the industrial specialist from a vehicle controlled by Gibson and ESR non-executive director Charles de Portes for an undisclosed price, with the company pointing to the deal as “further validating ESR’s market-leading position.”

Data Centre Pipeline

ESR expects an increasing contribution to its development pipeline from data centres, which represented 24 percent of ESR’s $6.3 billion of development starts last year. The company is building a capacity of 575 megawatts across eight sites in the region through its $1.35 billion ESR Data Centre Fund 1, in addition to a pipeline of land and projects that will contribute an additional capacity of over 1 gigawatt.

Overall portfolio occupancy stood at 91 percent as of December, down from 92 percent as of June, while occupancy ex-China stayed flat at 98 percent. The company saw record leasing of 5.3 million square metres across its portfolio, while achieving rental reversions of 23.4 percent, 19.5 percent, and 19.4 percent in India, South Korea, and Australia and New Zealand, respectively.

“New Economy demand has supported our record leasing activity, allowing us to achieve close to full occupancy in several key markets with double digit rent renewals being achieved across APAC (ex-China),” said Shen and Gibson. “Furthermore, we have a large and high value development workbook, where the contribution from our data centres is accelerating on the back of the rise in Generative AI.”

The company also saw shifts in its regional revenue mix, with Australia and New Zealand having replaced Greater China last year as its largest market with 14.9 percent revenue growth. South Korea notched the largest growth with a 34.7 percent jump in revenue to become ESR’s second largest market, while Japan and Greater China revenue fell by 19.7 percent and 19.5 percent respectively from the prior year.